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Ruling

Subject: Genuine redundancy

Question

Is any part of the termination payment received by the taxpayer the tax-free part of a genuine redundancy payment?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You are under 65 years of age.

You commenced employment with the Employer during the 199X-YY income year.

The Employer underwent operational and structure changes which resulted in your position in the company being made redundant.

In a letter dated during the relevant income year you were advised your position was made redundant effective immediately and that you would receive, in your final pay, accrued employment entitlements, five weeks in lieu of notice and six weeks redundancy pay.

You have provided an Employment Separation Certificate which states your employment cessation was during the relevant income year and that you were paid the following:

Entitlement	Gross
Annual leave	A
Payment in lieu of notice	B
Redundancy	C
Total	D

You stated that had you voluntarily resigned, you would have only been entitled to the payment of unused annual leave.

You state that none of the payments received were for payment in lieu of superannuation.

At the time of dismissal there was no arrangement between you and the Employer or between the Employer and another person, to employ you after the dismissal.

You have stated you did not provide the employment termination payment documentation when you lodged your relevant income tax return. As such, you have been taxed on all the amounts at your marginal tax rate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(4).

Income Tax Assessment Act 1997 Section 82-135.

Income Tax Assessment Act 1997 Paragraph 82-135(c).

Income Tax Assessment Act 1997 Paragraph 82-135(d).

Income Tax Assessment Act 1997 Paragraph 82-135(e).

Income Tax Assessment Act 1997 Section 83-10.

Income Tax Assessment Act 1997 Section 83-15.

Income Tax Assessment Act 1997 Section 83-80.

Income Tax Assessment Act 1997 Section 83-85.

Income Tax Assessment Act 1997 Section 83-170.

Income Tax Assessment Act 1997 Subsection 83-170(2).

Income Tax Assessment Act 1997 Subsection 83-170(3).

Income Tax Assessment Act 1997 Section 83-175.

Income Tax Assessment Act 1997 Subsection 83-175(1).

Income Tax Assessment Act 1997 Subsection 83-175(2).

Income Tax Assessment Act 1997 Subsection 83-175(3).

Income Tax Assessment Act 1997 Subsection 83-175(4).

Reasons for decision

Summary

The sum of the payment in lieu of notice and the redundancy payment is a genuine redundancy payment. As this amount is less than your tax-free amount, in respect of the genuine redundancy of this employment, it is not assessable income and not exempt income.

Detailed reasoning

Genuine redundancy

A payment made to an employee is a genuine redundancy payment (GRP) if it satisfies all the conditions set out in section 83-175 of the Income Tax Assessment Act 1997 (ITAA 1997).  This section states:

(1) A genuine redundancy payment is so much of a payment received by an employee who is dismissed from employment because the employee's position is genuinely redundant and exceeds the amount that could reasonably be expected to be received by the employee in consequence of the voluntary termination of his or her employment at the time of dismissal.

(2) A genuine redundancy payment must satisfy the following conditions:

(a) the employee is dismissed before the earlier of the following:

(i) the day he or she turned 65;

(ii) if the employees employment would have terminated when he or she reached a particular age or completed a particular period of service the day he or she would reach the age or complete the period of service (as the case may be);

(b) if the dismissal was not at arms length the payment does not exceed the amount that could reasonably be expected to be made if the dismissal were at arms length;

(c) at the time of the dismissal, there was no arrangement between the employee and the employer, or between the employer and another person, to employ the employee after dismissal.

(3) However, a genuine redundancy payment does not include any part of a payment that was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later time.

Payments not covered

(4) A payment is not a genuine redundancy payment if it is a payment mentioned in section 82-135 (apart from paragraph 82-135(e)).

Subsection 82-135 includes (among others):

Ÿ superannuation benefits;

Ÿ the payment of a pension or annuity; and

Ÿ unused annual leave (paragraph 82-135(c)) or long service leave payments (paragraph 82-135(d)).

As such, the payment you received for unused annual leave does not form part of a genuine redundancy payment pursuant to subsection 82-135(4) of the ITAA 1997. The taxation treatment of this payment will be discussed in due course.

The redundancy payment and the payment in lieu of notice will be addressed below.

During the relevant income year you were informed that your position was being made redundant effective immediately. Following this, your employment was terminated. As your position within the company was made genuinely redundant and you would not have been entitled to the redundancy payment and payment in lieu of notice had you voluntarily resigned, subsection 83-175(1) of the ITAA 1997 has been satisfied.

The three conditions pertaining to subsection 83-175(2) have been satisfied as:

Ÿ You were dismissed before you reached 65 years of age;

Ÿ The dismissal was made at arm's length; and

Ÿ At the time of dismissal, there was no arrangement between yourself and the employer, or between the employer and another person, to employ you after the dismissal.

A further requirement, as set out in subsection 83-175(3) of the ITAA 1997, requires that no part of the payment was received by the employee in lieu of superannuation benefits to which the employee may have become entitled at the time the payment was received or at a later date. As none of the payments received were for payment in lieu of superannuation, this requirement is satisfied.

Lastly, the redundancy payment and payment in lieu of notice are not excluded from the definition of a GRP. As such, subsection 83-175(4) of the ITAA 1997 has been satisfied.

As all the conditions under section 83-175 of the ITAA 1997 have been satisfied, it is accepted that the redundancy payment and payment in lieu of notice is a genuine redundancy payment.

Subsection 83-170(2) of the ITAA 1997 provides that so much of the genuine redundancy payment that does not exceed the amount worked out using the formula prescribed in subsection 83-170(3) is not assessable income and is not exempt income. Any amount in excess of the tax-free amount is taxed as an employment termination payment. As the total of your redundancy payment and payment in lieu of notice are below the tax-free cap, the amount is not assessable income and not exempt income.

Taxation treatment of unused annual leave

Unused annual leave would ordinarily be included in assessable income under section 83-10 of the ITAA 1997 and subject to marginal rates of tax. However, as this payment was made in connection with a genuine redundancy payment, section 83-15 allows a tax offset to ensure that the rate of tax on this amount does not exceed 30%.

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